Anti-austerity armada could sink Spain

As Spanish voters delivered a humiliating rebuff to the ruling Socialist party of Prime Minister Jos Luis Rodriguez Zapatero in local elections yesterday, huge crowds continued to gather in central squares across the nation to protest against the ineptitude of politicians in dealing with the country's economic woes and disastrously high unemployment levels.

In Madrid, tens of thousands of young people calling themselves the "indignant” set up tents at the Puerta del Sol, a square in the heart of Madrid, that has become the epicentre of the nationwide protest against Spain's deepening economic crisis, and the seeming inability of politicians to find a remedy. Fearing violent clashes, the Socialist government chose not to enforce a ban on such demonstrations that came into effect midnight Friday.

The protest in Madrid is part of a national wave of youth-led protests, largely coordinated using Facebook and Twitter. Just over a week ago, a group of dissatisfied young Spaniards calling themselves 'Real Democracy Now' organised demonstrations in around 50 cities around the country. Since then, the "May 15 movement” (the 15-M) has swollen to include those who are "indignant' at the dire state of the economy, and the gulf that has opened up between ordinary Spanish citizens and the two political parties that dominate the country's political landscape – the left-wing Socialist Party and the conservative Popular Party.

One common theme in the protests is outrage at the country's high level of unemployment. The unemployment rate in Spain is 21 per cent, the highest in the European Union, and more than twice the European average. For those aged under 25, the unemployment rate is a staggering 45 per cent.

Many feel that Spain's economic woes have been intensified by the austerity measures introduced by the Zapatero government, aimed at cutting the country's budget deficit and preventing the country from following the path of Greece, Portugal and Ireland in seeking a bailout from the European Union and the International Monetary Fund.

But Spain's Socialists paid a hefty price for the measures at yesterday's regional and municipal elections, where they suffered their worst electoral defeat in more than 30 years. With 85 per cent of the vote counted, the opposition Popular Party of Mariano Rajoy won 37 per cent of the vote, compared with only 28 per cent for the Socialists.

In the lead-up to Sunday's elections, opinion polls suggested the opposition Popular Party would dislodge the Socialists from their traditional bastions of support such as Castilla-La Mancha and Extremadura regions, as well as Barcelona and Seville, the country's second- and third-largest cities.

Markets are concerned that the latest electoral defeat, along with the ongoing protests by the May 15 movement, will weaken Zapatero's minority Socialist government, at a time when it is struggling to convince investors of Spain's ability to meet its ambitious targets for economic growth and reducing its budget deficit.

There are also worries that the incoming regional and municipal governments could reveal huge levels of hidden debt, as happened in Catalonia. After elections in November, where moderate Catalan nationalists dislodged a Socialist government, the new administration revealed the region's budget deficit was twice as large as previously disclosed.

Concerns about the ongoing protests and the state of regional finances have pushed up Spain's borrowing costs in the past week. On Friday, the spread between Spanish 10-year bonds and benchmark German bunds widened to 243 basis points, the widest in more than five months. Yields on 10-year Spanish sovereign bonds have climbed to 5.48 per cent, only a fraction below their euro-era high of 5.55 per cent.

With an increasingly acrimonious divide emerging among eurozone officials over restructuring Greece's debt (Greek bund-fight turns ugly, May 20), investors are increasingly anxious that Spanish politicians may decide that the political and social costs of austerity are simply too high, and that foreign bankers should share some of Spain's pain.